October 29, 2005
Shareholder value
is not the same as shareholder wealth
A reflection on Mark's post on the Friedman proposition:
I am not comfortable with corporations getting in the doing-good business on the whole, by which I mean charitable contributions. political activity outside their narrow business interests, and similar activities. This is partly because of the slippery-slope problem of excess, and partly because I fear that most corporate executives have some ideas of good that aren't mine. (Of course, the second of these isn't a moral case and shouldn't count for much.) Still, much as I appreciate (for example) corporate support of the fine arts, I'd prefer we find another way to fund orchestras and museums.
What the Friedman argument is missing, it seems to me, is a realistic idea of what shareholders want with regard to how their companies do their own business, and all sorts of good behavioral evidence shows that to be a lot more complicated than maximal money returns. Friedman is right that corporate leadership is obligated to advance the interests of shareholders, but it is also obligated to discern these interests and discover--I expect--that shareholders want to trade some possible returns for a clear conscience about environmental responsibility, decent treatment of workers, honesty in trade, and the like.
It's complicated to discern these things, they are much messier than just looking at dividends, and errors are a certainty, but just because doing the right thing is hard doesn't mean it isn't right. That's the sort of thing we pay them the big bucks for, making tough calls about important questions with imperfect information.
